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Tuesday, January 18, 2005

Europe's Gas Dilemma
Natural gas is the fuel of choice for power generation, at least when it is available and its price is in rough parity--on an energy equivalent basis--with oil and other fuels. Europe, in particular, will see steady growth in gas consumption in the power sector as nuclear power stalls everywhere but France and as EU adherence to the Kyoto Treaty's greenhouse gas emissions targets makes coal unattractive. Fortunately, Europe sits at the doorstep of the world's largest gas exporter, with far and away the largest natural gas reserves on the planet: Russia. But therein lies the dilemma, as increasing reliance on Russian natural gas coincides with an assertive and increasingly autocratic Russian government.

Europe (EU-25) already imports 6.7 trillion cubic feet (TCF) of natural gas per year net of exports, with 4 TCF of it coming from Russia. This will only increase as North Sea oil--and its associated gas--dwindles and the continent's mature gas fields, such as the enormous Dutch Groningen field, deplete. Algeria, already a major supplier to Europe, can do more, but on a smaller scale and chiefly for countries fronting the Mediterranean. This leaves the Middle East as the only real alternative, with its attendant challenges.

How worried should Europeans, and especially Germans (as noted recently in the Financial Times) be about relying on Russia for the lion's share of their future natural gas needs? From a purely economic perspective, this seems as much of an opportunity as a challenge, since it would leave Russia with lots of Euros for either investment or consumer goods imports. But politically it could create a subtle form of veto that some might argue has already been exercised to give Russia a free hand in Chechnya.

In the long run, the situation gives Europe as much of an incentive as the US for the creation of a thriving global market for liquefied natural gas (LNG), and for the construction of the infrastructure necessary to import it. This might not displace Russian gas supplies, but it would help keep prices in balance with world levels and give traditional suppliers some healthy competition.